Pepper’s home loans in spotlight

Pepper Money flagged a retreat from the lending space when delivering its results in February.

Speculation is mounting that Pepper Money is moving to sell its prime mortgage business after it flagged a retreat from the lending space when delivering its results in February.

The $584m listed company told DataRoom it did not currently have a sale process running, but would not comment on whether there were plans to divest the prime lending portfolio.

But sources told this column they believe the business is on offer, and a deal made sense for one of the big four banks.

Non-bank lenders like Pepper Money, Resimac and Humm trade at about three or four times their earnings, and observers say buying the whole business rather than the lending book is possible.

Buying Pepper’s prime loans makes sense for banks like CBA, NAB, Westpac or ANZ because they acquire customers without having to lure them away from their rivals.

Private equity funds Blackstone and Apollo Global Management have been in the hunt for loan portfolios of late, but they would be unlikely to pay a price acceptable to Pepper Money, which was listed by Kohlberg Kravis Roberts in 2021 with a $1.3bn market value.

The big four have an advantage in the prime lending market in that they do not have to hold as much capital against their loans as regional and smaller lenders that must adhere to standard risk weights.

Pepper has specialised in loans to customers that do not meet typical mortgage criteria from the top four banks, such as self-employed trades people.

The latest situation surfaces as ANZ moves to demonstrate to the Australian Competition & Consumer Commission that an acquisition of Queensland-based Suncorp Bank would not substantially lessen competition.

It could be argued that Pepper’s exit from prime lending is another example how financial groups are unable to compete with the big four for mainstream mortgages.

In February, chief executive Mario Rehayem said the decision to distance itself from the prime lending market was linked to higher funding costs and uncertainty in the housing sector, and the group would instead favour asset finance and nonconforming loans.

For 2022, Pepper Money reported an 8 per cent lift in net profit to $140.5m.

It said that growth in originations from prime borrowers was down $3.6bn, but assets under management for prime loans had increased 7 per cent to $6.6bn. The weighted average interest rate for its prime loans was 6.6 per cent. Total assets under management rose 13 per cent to $19.2bn.

Prime loans accounted for about half of Pepper Money’s originations last year.